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Alba Iulia
Thursday, August 6, 2020

The Four E’s

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Mervin Medelhttp://Philtimes.com.au
I am a stock market investor. I have been in the Philippine stock market since 2009. I read a lot about value investing and fundamental analysis. I am a big fan of the billionaire Warren Buffett. I use his investment philosophies as my style of investing.


The greatest Enemies of the Equity investor are Expenses and Emotions. – Warren Buffett, Berkshire Hathaway 2004 Chairman’s Letter to shareholders


I remember an analogy used in a book about the stock market. It’s like casino. It has calibrated all odds so as to always win against anyone who tries to beat it.

Ever heard of a casino getting bankrupt because the gamblers outsmarted the house? None. The house always wins.

The stock market could be your casino if you cannot control your emotion and consequently trade your stocks. You are not investing but gambling. You are losing money instead of winning.

What shall we do then?

Stay calm

The market is very volatile. If you take a look at a day’s chart, many times it goes up and down. It never is a straight line. It looks scary and putting your money seems risky.

But if you take a look at a chart with a minimum of five-year range, it looks like a straight line. And it is a line upward.

Chart for a day. Source: Bloomberg
Chart for a day. Source: Bloomberg

Five-year chart. Source: Bloomberg
Five-year chart. Source: Bloomberg

The Philippine Stock Exchange index (PSEi) in December 2000 was around 1,400 points. As of this writing, it is 7,200 points. If you view the chart from afar, it’s like a straight line up. You can barely see the down periods.

What’s my point? Stay composed when the market experiences turmoil. Controlling your emotion would be to your advantage.

Know that down markets do come naturally. They’re not permanent. Great businesses will continue to make more money despite these events.

If you are not yet in the market during turmoil, it’s time for you to buy shares of excellent companies and leave it there.

After buying, it is better to just watch good movies than monitoring the market all day. That way you insulate yourself from the emotions of the market which may prompt you to be scared or overjoyed and eventually trade.

I mentioned in one of my previous articles about my story with URC. I remembered being carried away by the emotion of the market. It really is contagious I tell you.

I bought its shares at P28 and sold too early at P50. I was scared at that time. I never bought it back and now it’s P189 I think; I just don’t want to look at it.

Being emotional is costly.

Trade less

If there’s one thing overlooked by traders, it is the expenses incurred in every trade. Well, only few people heed about trading less. Most are itching to do something as soon as the market opens.

One book I read says, the costs of trading wear away your returns. Constant buying and selling a hot stock can cost 2% to 4%. That’s a big minus to your fund.

An author even calls trading as one of the best weapons ever invented for committing financial suicide. Why?

Most people lose money trading, to the point that they eventually declare that the stock market is a casino. Of course traders and speculators won’t admit they are gambling.

They’ll always say it’s the best way to make money.

What they don’t realize is, the more they trade the less they keep. And this means the lesser they have, the more their brokers have.

You can avoid it. Choose your broker well. You should wonder if a broker urges you frequently to buy and sell stocks. He is likely a salesman and not investor-friendly. Remember that he receives commission on every transaction you do, whether you make money or not.

Your broker silently says, “heads I win, tails I still win.” I have an online account, by the way, so I don’t rely on my broker’s advice.

Your proper attitude should be the same with your broker, “heads I win, tails I still win.” How? Once you buy shares of great businesses, it’s better to leave them there and do other important things.

When the market is down, be happy because you could buy more shares of the great businesses you have. If the market is up, be happy as well because the market confirms your choice of stocks and probably sell when the market is overvalued.


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